Grove Farm plaintiffs win key ruling

A judge says the firm's former board failed to exercise due care in selling to Steve Case

LIHUE » A Kauai judge yesterday made it easier for former shareholders of Grove Farm Co. Inc. to prove that the company's former directors acted improperly when they sold the company to AOL co-founder Steve Case six years ago.

By ruling that Grove Farm's former board of directors failed to exercise due care while overseeing the sale of the company in 2000, Circuit Judge Kathleen Watanabe has shifted the burden of proof to the defendants, who now must show they did the best job they could to get a good price for Grove Farm when they sold it to Case.

Corey Park, an attorney for the former directors, said that Watanabe had made her decision based on a limited record that failed to show the full story of the sale.

"We will have an opportunity to present the entire record to the jury at the appropriate time," Park said.

A trial is scheduled for Oct. 23.

A former sugar company founded by G.N. Wilcox in the 1800s, Grove Farm controlled thousands of acres and the biggest shopping center on Kauai in 2000. With the company strapped for cash at the time and the Kauai economy in the doldrums, board members represented to the public and shareholders that the company was in dire financial shape with few options except to sell out.

A central question is whether the sale was in fact necessary and whether the board informed shareholders fully about the company's financial shape. Two camps of former shareholders have filed separate suits centering on those overarching questions.

Yesterday's ruling involved a suit filed by Michael Sheehan and Keith Tsukamoto, who allege that the company was not in dire danger, and that the board of directors did little to find the best price for the company before selling it to Case.

Watanabe said yesterday that the plaintiffs had proven that the board "did not exercise due care" when they chose Case's bid of $25 million and $60 million in debt.

In partially granting the plaintiffs' motion for summary judgment, Watanabe pointed to meeting minutes and depositions of board member and defendant Pamela Dohrman. According to these documents, Watanabe said, there were no appraisals of the company before the sale, no discussion of a $1 million termination fee if the Case deal fell through, no discussion of "material terms," and no discussion of the negatives of the Case deal before the board decided to accept the Case offer.

The decision means the defendants cannot argue the "business judgment rule" at trial, Watanabe said. That rule gives boards the freedom to make business decisions, including decisions that prove to be bad ones, without having to fear that they will be sued later by shareholders.

Watanabe said the business judgment rule is moot because the board did not "exercise due care" during the selection process.

That means the defense "now has the burden at trial," said Richard Wilson, an attorney for the plaintiffs. "The (former) board (members) have got to demonstrate that they were adequately informed" when they made the decision to sell.

But Park, the attorney for the former board, said the ruling does not change the central issue of the case, and he expressed confidence that the board will prevail on that.

"The issue is still the same: Did the directors act in a reasonable way?" he said. "And we believe they did and will be able to prove that."